"The Franco-Polish film-maker will not be extradited to the United States and the measures of restriction on his liberty have been lifted," Justice Minister Eveline Widmer-Schlumpf told reporters at a press conference.
The announcement comes 10 months after Polanski's dramatic arrest on a US warrant which saw him originally confined to prison before being bailed on $4.5 million dollars and ordered to surrender his passport.
Polanski, 76, was also not allowed out of the grounds of his property in the ski resort of Gstaad and was fitted with an electronic bracelet.
The Oscar-winner is alleged to have plied a girl called Samatha Geimer with champagne and drugs during a 1977 photo shoot at the Hollywood Hills home of actor friend Jack Nicholson before having sex with her despite her protests.
The director was initially charged with six felony counts, including rape and sodomy. The charge was later reduced to unlawful sexual intercourse after a plea deal agreed in part to spare his victim the ordeal of a trial.
Polanski later served 42 days at a secure unit undergoing psychiatric evaluation but fled the United States on the eve of his sentencing in 1978 amid fears that the trial judge planned to go back on a previously agreed plea deal.
While he fought his extradition, Polanski insisted he had served the time agreed and claims to the contrary in the US extradition warrant were false.
He has received support from a host of prominent members of the film-making industry as well as politicians.
Polanski received another wave of support after he was hit with fresh sex crime allegations in May, this time made by a British actress Charlotte Lewis who claimed that the director "forced himself" upon her just after her 16th birthday.
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